So recently I’ve run into a recurring comment from business owners when they are being approached about running an offer again. It generally goes:

“Daily Deal buyers only came in for the deal, and no one spent any money above the face value of the voucher.”

Or they say:

“Daily Deal people were nothing but problems.”

I’ve been tracking the behavior of the people who say things like this vs the people who are eager to resign and continue working with their daily deal provider of choice, and here’s what I’ve found out.

There is a type of blindness that comes from being the operator of a business. The long hours, unforgiving schedule, and endless number of things to deal with mean that operators filter what they deal with. When this is the case then owners are only brought the problems that their staff can’t, or doesn’t want to, deal with. But they never hear about the person who came it, had a great experience, and moved on. These owners end up with a laundry list of complaints, and no balancing positive experiences. It’s not that the good didn’t happen, but they’ve become blind to it.

Alternatively, there are some operators that spend the extra effort to track what happens at each transaction. They end up with a full record of what every person, the daily deal user and regular customer, deliver to their business. With this data the business’ can see what really happened and compare it to the problems that had to be dealt with. Every single merchant who has done this maintains multi year relationships with their daily deal provider, and almost all of them increase their daily deal spend.

The difference is so stark it’s unmistakeable what’s happening. Now I don’t have the means to evaluate these facts beyond my little pond I work within. However, this is not a subtle difference where I am I can predict with 99% accuracy who will be a repeat daily deal merchant based upon no other information then their tracking of redemption behavior.

So for all of you operating a daily deal site it’s becoming clear that their is a competitive advantage if you have tools for your merchant to track. And if you can get your merchants to use them! And it you’re a rep selling these products then you should invest the effort of getting your merchants to track behavior. It’s better to get someone’s business

So all of the political stuff tonight got me thinking. It’s a good time to sum up 2011 and take a look at where we stand today. The daily deal industry has seen huge changes over the last year, and I thought people might like to hear what it’s been like on the inside. So in the next couple of days that’s just what I’m going to do!

Quick comment and link to the source. Groupon grew in November not running any holiday focused specials, while LivingSocial ran a slew of holiday focused deals and promotions and saw a reduction in revenue. Groupon saw a 6% increase in revenue despite a poor holiday weekend showing. LivingSocial showed a stronger holiday weekend, but saw monthly revenue decrease by 5%. I’d suspect that Groupon’s heavy presence in the media due to it’s IPO has increased it’s visibility and it’s as a result capturing more of the available market.

For the next part in the series I’m going to focus on another data from the Rice University Study by Utpal M. Dholakia. Titled “How Businesses Fare With Daily Deals: A Multi-Site Analysis of Groupon, LivingSocial, OpenTable, Travelzoo, and BuyWithMe Promotions” the study focus’ on the viability of the Daily Deal business model. That’s not super useful for business owners to know, as I’m sure they’re worried about their business’ viability! However, burried inside that study was a wealth of great data for someone wanting to know more about running a deal of their own. Part 2 then will focus on redemption.

So you’ve run your deal, and are wondering what’s going to happen now. According to the study 80% of the people on their way to you will be new to your business. The study confirmed what most of the business’ I work with see, and that’s what I tell them to expect. It said that around 1/5th of those who come to your business will become return customers. Average breakage (vouchers never redeemed) was reported as 22%. With an average spend of $64 I’m going to do a little math:

Assumptions:
Daily deal blast email to 80k people
You sell 500 deals
Was a $50 for $25 offer
You pay 50% commission

So for reaching 80,000 people your business is up almost $17,000. Now to send 30,000 direct mail peices might COST you $5k-$15k.

So +$17k vs -$5 to 15k. And that’s if you reach less than half as many people in less effective medium.

I think that this is a pretty compelling reason to suggest that daily deals are a significantly better value to a business that wants to promote themselves. Now from that $17k you will have costs. But only marginal costs, not total costs. The normal opperation of your business should not be interupted if you’ve read my post “How to run a deal and not to get screwed over.”

Most people right now only compare the daily deal vouchers to customers coming in on their own, and can’t stop thinking that they are loosing money. But the proper comparison should be with other forms of marketing. Don’t fall in the sales comparison trap!

By now almost everyone has heard about a business that ran a deal and was ruined as a result. Each time it’s likely that one of three thing happened. It’s the three things that if you even have one of you probably should not run a deal.

1.) You did not cap the deal

This is just handing your business over to someone else who’s motivation aren’t the same as yours, and are totally revenue driven. Daily deal companies do not care about your limits. They care about how many dollars they can extract from their email list that day. Here’s a good example. Early on, say mid to late 2009, a small cupcake shop in San Francisco was called up by a rep. These guys had themselves and maybe 4 employees. Like many business’ they assumed that hey it’s worth while to not make any money on a few customers for a bit of press. What the heck, how many would get sold? They didn’t even ask questions. Ran a deal for 1/2 off a dozen cupcakes, and sold almost 4500 offers in 24 hours. They suddenly added a 50,000 cupcake liability to their books. So many people were redeeming that none of their paying customers could even get in the doors. So now they’re working strictly at cost until they can make 50k cupcakes. They tried to get bank loans just to buy the flour they needed. Bank told them to get real. Their staff was working so many hours they started to quit. Now, if memory serves this place might have just squeeked though and kept alive. But I’m not sure of that.

2.) You’re already financially shaky, and use the check to keep afloat.

If your business is out of cash, and you need the check from your deal to pay the bills, then you’re just putting off the inevitable. So a local house cleaning company runs a deal. In this case the rep set up the deal correctly. Was limited in capacity, and properly reflected the business’ normal pricing. Problem was that this business wasn’t attracting any business otherwise. They starting calling the company as the check couldn’t get there fast enough. They go out of business. The deal really didn’t hurt or help, as they couldn’t even stay afloat long enough to convert any fraction of customers into repeat business.

3.) You change your business model to allow daily deals to become your sales channel

This is what happens to people who are the most afraid of selling themselves. Suddenly there’s someone who can get people to show up at your door, so why do that icky selling. So they start reducing their fixed costs, start cutting corners, and remove value so that the money they get from daily deals is enough. But now these business’ have to start running lots of deals. They’re on Groupon, then LivingSocial, then Amazon, then HomeRun, and then Tippr. Well people notice, and each time an offer runs fewer and fewer are sold. People catch on, and this business goes under.

Any of these are terrible, and sometimes people have all three. I’ve never seen a daily deal be the root cause of someone going out of business, but there have been lots of owners who’ve let these tools get misused. If your worried about this happening to you here’s my advice on what to do:

So a study was published recently that seemed to call into question the viability of the daily deal business model. While I don’t agree with the study’s conclusions about daily deal operators, I think that it does contain interesting info for people who are interested in running deals. I’m going to put together a series of posts that look at how the data inside that study applies to the business’ that get featured. This is part 1

The first data I’ll mention is about money. If you recall in my previous post the goal of a daily deal shouldn’t be about making money; however, here are the stats of how people actually make out. According to their survey of 324 business that ran a deal 55.5% of them reported making a profit, 17.9% broke even, and 26.6% of people lost money. Remembering that daily deals are the replacement for an expense this should be exciting. 73.4% of all business’ then have run very successful deals and perhaps a majority of the remaining 26.6% were success’ too, when success is measured by whether or not doing the deal cost less than equivalent marketing would have. Even among those that lost money they would have to have spent money buying effective marketing from someone else. Buying an email/snail mail/advert isn’t cheap, and is far less trackable than a daily deal.

The take away from this is that for an overwhelming majority of people who run a deal they have reduced an expense to less than it was in the past. If your marketing budget could be reduced then much how would that impact your business? Ok, that’s the first main data point in the study. In the next post I’m going to be talking about those remaining people who got crushed when they ran a daily deal. I’m going to outline the mistakes that they all share, and how to avoid them. Then, back into the data.

Small business owners? I’m looking at you here. Daily deals are a tempting way to get people coming to your business, but we need to have a little talk about why you’re doing this, and how to tell if you’ve done well or not. Trust me, after talking with thousands of merchants, it’s clear to me that where small business’ are making their mistakes is where they are placing the goal posts. And the sales reps from the daily deal companies aren’t helping you with this.

First off then. Be clear with yourself about why you’re running a deal. If you want to run a deal to make money STOP! If you think that check you’re getting is there to help you STOP! If you’re not comfortable running a deal and not making any money, and know that the check you get is already spent then you shouldn’t be running one. The reason to run a daily deal is the same as if you were going to pay someone to put an add in the paper, or do a mailer, or buy a radio spot. If your deal is designed right, then the check you get will exactly equal your marginal costs for providing those additional products/services/things. What you’re actually getting is to be on the daily deal company’s email list. And that’s it. The deal pays the deal company and covers any increase in costs you may have. That’s what a win is, and if anyone tells you otherwise they’re blowing smoke up your backside to get you to sign an agreement.

Ok, so the bad news section is over. Here’s the good part. If you’re clear on the section above, and you’re not fool enough to run a deal every other week on every site, then you’re going to get a great value. Marketing has existed for a hundred years, and its value hasn’t changed. It’s great to get people to hear about you for the first time, and the daily deal is the only marketing out there that people are actually looking forward to getting. Can you really say you’re looking forward to seeing the adds on tv, or the spam in your inbox (some daily deal sites have been accused of buying lists and are therefore spam, but the author has no evidence to support that claim), or the mailers in your mailbox? Just don’t make it something holy or special. They aren’t doing anything new for you, but they are doing it better.

Ok, so the rev share is important, but not that big of a deal. You’ll feel like it is, but odds are the only change you’ll get between all the players will be so small that you can’t make anything remarkably better by making that the biggest thing. What you really want to get is to be seen by as many people as possible. That means getting a clear understanding of how many emails are getting sent for you. And just you. Groupon, for example, will segment their email list each day based upon a bunch of factors. So while they may reach thousands of people in your area on your day, you might only get to be seen by hundreds. Sure you’ll be on their site, but you want to be in peoples inboxes. You should get a clear understanding of how many emails (to the nearest 5k at least) they will send out. Get it in writing if you can. That’s the product you, the business owner, are buying so don’t get shafted.

Ok, so here’s are the rules to follow to make sure you’re not getting screwed:

1.) You know exactly how many emails will be sent on your behalf

2.) You’ve agreed to a deal that you understand isn’t about making money, and if you don’t you are ok

Quick tips to make the deal experience better:

1.) Someone, probably you, tells your staff that they need to tell people about what else they can get. Even if only 15% of people buy more that’s money on that transaction that you didn’t have to split with your marketers. If you’re not asking you’re letting it walk out the door.

2.) Do not run a deal more frequently than your average customer visits your business. If you’re a restaurant you can, maybe, run 4 a year. I think restaurants should not exceed 3 times a year. Any other business should probably not exceed 2 times a year. You’re the expert on your business, but if you make deals a routine then people will learn to wait for them. Keep ’em rare, keep ’em special.

3.) Decide ahead of time how many deals you’re comfortable selling. If the big players caps are too high find a smaller player and work with. Here’s a rule of thumb. If you sell 500 deals, and your voucher is good for 6 months expect 3 extra transactions a day. If you paint houses, you better be able to handle that. If you’re a restaurant with 20 tables and 3 turns a night then you’re limit should be much higher. But know it in advance, and get it in the contract. DO NOT SIGN A CONTRACT WITHOUT A LIMIT.

Ok, this is running on. It’s a good start and will keep you out of trouble for now. I’ll get you more good advice later.

Ok, so I’ve been part of the Daily Deal business since it’s earliest days. I was brought on by the founders of one the major companies in the space now. I’m being intentionally non-specific as to which company, as I’m trying to stay anonymous on this blog. I’ll be intentionally altering dates, names, and places to help maintain that anonymity.

My intention is to tell the world about what the view has been from the other side of the business.

So since 2009 I’ve been responsible for getting the deals that you see everyday in several cities over my tenure. I’ve seen every possible permutation, mistake, and success over the last several years. I’ve read a lot of the complaints, and there will be some here too, but I also think that there huge misconceptions about what failure and success of promotions are.

I’m hoping that I’ll be able to help people understand what this whole thing is. How to use it like a pro, and know when to avoid it. How to measure success, and judge failure. Most importantly I would like to share what the people on the inside are going through, see, and feel.